HEINDRICK SO

Here is the email sent by Downey Savings and Loans regarding their portfolio product, the Pay Option Arm (NegAm) – otherwise known as the Equity Crusher, Janitor Loan, or the Foreclosure Application.

Effective immediately, we will be eliminating the Portfolio Products A100 and A141. All loans in the system will need to lock by close of business Monday July 14, 2008. The loans must fund by Friday August 29, 2008.

Here is a quick recap of some other lenders who offered the Pay Option Arm in the past:

• Countrywide
• Wamu
• Bear Stearns
• Indymac
• Wachovia

Well, look who we have here. “Hmm, I…I wonder…no can’t be” I think most can see the trend – if not, here is the scoop: these are some of the major front page companies which have either gone down or post serious declining numbers in the recent housing crisis. The one thing they all have in common; they all serviced option arm loans.

They were tempting

The fact is, these loans were the hottest things a few years ago and we are all going to pay the price now. The option arm was popular for two big reasons. To the consumer, the neg-am option was the equivilaent of a credit card’s minimum payment – except now it was for a home. To lenders, this seemed like a great loan as they could claim revenue based on the negative amortization – yes, it was magical income.

Unfortunately, consumers cant pay the recast payments and lenders cant collect because of the declining house values.

In this market, those with Option-Arms should speak with a financial advisor or a mortgage consultant to evaluate their choices. Most likely, a loan modification will be the only hopeful option as  refinancing out of one has become quite tough due to stricter guidelines and declining values.